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New legislation proposed to tackle unfit directors of dissolved companies

Posted on 2 June 2021

The Government is planning a clampdown on company directors who seek to take advantage of the company dissolution process to avoid paying creditors and avoid investigations into their conduct. Under the proposed legislation, directors who are found to have improperly abused the dissolution process could face disqualification of up to 15 years.

The provisions are included in the Ratings (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill (the "Bill") which had its first reading on 12 May 2021. Under the proposed legislation, the Insolvency Service will be given power to investigate the conduct of company directors, including former directors, of dissolved companies. If wrongdoing or misconduct is found, directors can face sanctions including a disqualification of up to 15 years. The measures aim to help prevent "phoenixism", whereby directors cause a company to be dissolved so that it can shed its liabilities and then go on to set up a new company with a near identical business but without inheriting any of the liabilities of the dissolved company.

Significantly, these new powers will be retrospective, meaning that the Insolvency Service could exercise the powers in relation to companies that were dissolved prior to the legislation coming into law. Under the proposals, applications for a disqualification order in respect of a former director of a dissolved company would have to be made within three years after the company was dissolved.

Currently, the Insolvency Service only has powers to investigate directors of live companies or those entering a form of insolvency. This means that it is not possible to investigate the conduct of former directors of dissolved companies without first applying to the courts to restore the company to the register of companies which can be a timely and costly process. The new measures would allow investigations into the conduct of former directors of dissolved companies without it being necessary to first restore the company to the register. It will also not be necessary for the dissolved company to have been subject to insolvency proceedings in order for the power to investigate to apply.

On announcing the Bill, Business Secretary Kwasi Kwarteng said:

As we build back better from the pandemic, we need to restore business confidence, but also people’s confidence in business - which is why we will not hesitate to disqualify directors who deliberately leave employees and the British taxpayer out of pocket.

The Bill is due to have its second reading on 15 June 2021, during which MPs will debate the general principles and themes of the Bill.

While the legislation aims to address broader public concerns about the abuse of limited liability and is in part a response to a 2018 Government consultation on corporate governance and reform, the Government is also eager to avoid this loophole being exploited by companies seeking to avoid repaying state-backed emergency COVID-19 loans.

Accordingly, the Bill also reflects a promise made by the government in the Budget earlier this year that it would clamp down on COVID-19 fraud. Other measures include a plan to raise public awareness of enforcement action to deter against fraud and an investment of over £100million in a Taxpayer Protection Taskforce. The Taskforce will consist of more than 1,000 HMRC staff specifically tasked with tackling fraud within COVID-19 Government support packages, including the Coronavirus Job Retention Scheme and the Self-Employment Income Support Scheme.

Directors should always be mindful of their duties, in particular if the company is facing insolvency, and should take advice before taking any steps to dissolve the business. If you require advice on this issue or directors' duties more generally, please contact our Director and Shareholder Disputes team.

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